Autozone Accelerates

By Greg Sushinsky | May 27, 2011 AAA

Auto replacement parts and accessories retailer Autozone (NYSE:AZO) powered its way to its 10th consecutive quarter of 20% or more earnings per share growth. The company's fiscal third quarter saw net income gain 12% on solid net sales.

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The Quarter's Results
Autozone's net sales increased from $1.8 billion in the year ago quarter to $2 billion in this year's. Same store sales increased by 5.3%. EPS was $5.29 per diluted share on net income of $227.4 million, an increase from last year's third quarter EPS of $4.12, or a net profit of $202.7.

More on Autozone's Quarter
AZO's inventory was up 8.9%, which reflects both a higher store count as well as stocking of parts. Slightly higher operating expenses due to increased fuel costs delivering products to its commercial customers, along with more investment in its hub stores, pushed the operating expenses as a percentage of sales up to 31.4% from 31.1% in the year ago quarter. Gross margins, however, rose to 51.2% from 50.7% in the same period. Higher merchandise margins were cited by the company as the reason for this increase. Autozone's management pointed out that it achieved a 30.2% return on invested capital, and $1 billion in sales in its commercial division in the last four quarters. (NOI is a long-run profitability measure that smart investors can count on, check out Zooming In On Net Operating Income.)

Autozone Stock and Market Reaction
Autozone easily beat analyst estimates of $1.92 billion for revenue and $4.98 EPS. The stock also rose to an all-time high after release of the earnings report. In addition to reaching a share price of $293.76, the company has repurchased 1.3 million shares of its stock. The stock still sells for only 14 times earnings. There may still be significant room for growth in Autozone's business, as management feels it can continue to grow earnings at a pace similar to the current rate. Autozone's disciplined approach has resulted in the company taking market share as well.

Auto Parts Retailers Still Hot
Rival Advance Auto Parts (NYSE:AAP) recently reported earnings, posting a 1.4% increase in same store sales with net income essentially flat, although its EPS grew by 13% due to fewer shares outstanding. Still, the auto parts retail space has been strong for quite a while, with O'Reilly Automotive (Nasdaq:ORLY) continuing its sales and earnings growth. (Find out what these company programs achieve and what it means for stockholders, read A Breakdown Of Stock Buybacks.)

Pep Boys (NYSE:PBY) recently purchased Big Ten Tires & Automotive, to give it a presence in the south. Much smaller US Auto Parts Network (Nasdaq:PRTS) had strong EBITDA which offset restructuring charges, so the industry success has spread well beyond the big names. The key for the auto parts retailers is how much they can keep this up in the face of potential rising costs of materials and fuel.

Autozone For Investors
Autozone stock has left its 52-week low of $180 in the dust as a dim memory. Even though the stock is trading at only a 14 forward P/E, value investors wouldn't want to buy it at its all-time high, and there are some potential headwinds for the sector and for Autozone. The most pressing question is whether the company can sustain the kind of outsized growth its been forging or whether it will slow down. The economy, with its rising gasoline prices holding back consumers, may have its say. Yet the sector did well during the recession, and Autozone is a powerhouse with terrific management, so it's not a stock to bet against lightly. (Learn more in 5 Must-Have Metrics For Value Investors.)

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